The macro landscape: Commodities is now booming at a scale not seen since the turn of the 21st century! While investors have been expecting the “Commodity Supercycle”, the present magnitude of the number of commodities with exponential price appreciation has surprised even the most experienced.
What happened? During the Covid-19 pandemic, commodity prices fell as demand evaporated and supply and inventories shrunk to dangerously low levels. Pent-up demand emerged once borders reopened and demand for commodities led economies from a supply-shock to rapidly-surging inflation and the global food crisis happened. Geopolitical situations like the Russia-Ukraine war and China’s lockdown have further boosted commodity prices. India has banned wheat exports and reduced sugar exports, Indonesia has restricted the export of palm oil products and Malaysia has banned chicken exports, all in a bid to curtail food inflation in their respective countries.
Where are prices heading?
Prices of corn, sugar, wheat and coffee have rocketed to multi-year highs. Crude palm oil (CPO), used for cooking and as a biofuel, is trading at price levels not seen before. According to The World Bank, agricultural commodity prices will continue going up and remain elevated well into 2024. Unless supply shortfalls and pent-up demand goes down, and depleted inventories levels are replenished, commodity prices are not expected to return to pre-pandemic levels. CPO for example, will trade above 6000 ringgit per tonne despite the product heading into its peak production season in the next quarter.
What can investors and traders do?
You can manage your cash-flows by hedging through futures contracts. There are opportunities in CPO futures, as well as agricultural commodities like CBOT wheat futures CME/ICE energy futures.
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